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Is 4 Percent Still the Safest Retirement Amount?

Brian O'Connell

One of Wall Street's most rock-solid tenets is increasingly coming under scrutiny, if not outright attack, from industry insiders.

That would be the once-venerated 4 percent annual retirement drawdown, which is something of a staple in the financial planning industry. But now, more financial experts say the conventional wisdom on annual retirement withdrawals from savings (at 4 percent) is an incorrect and low cash pullout number.

That's primarily due to declining financial markets, heightened inflation and higher financial fees, experts say.

Back in 1994, William Bergman, a now-retired California financial planner, published a report in the Journal of Financial Planning that pegged 4 percent as the "safest" withdrawal number that would hike the odds of retirees not outliving their money. By and large, Bergman's 4 percent rule was meant to cover 30 years worth of retirement savings. Thus, if a newly-minted 65-year-old retiree could manage to limit annual withdrawals to 4 percent of savings, he or she would still have retirement fund cash available to them by his or her 95th birthday.

Since then, and especially over the past decade, Bergman's figures have come into question. In fact, Bergman even admits it's time to recalibrate the numbers to see if his 4 percent benchmark still stands up after scrutiny.

"To a large degree, the 4 percent guideline was developed not as a wealth management technique, but as a communications tool," says Stuart Ritter, retirement specialist at PNC Wealth Management in Baltimore. "It helped people translate what seemed to be an infinite sum, such as $1 million, into a more-relatable annual income. For example, for a $1 million retirement portfolio, 4 percent meant $40,000, which is 4 percent of $1,000,000. The guideline was never intended to be an entire strategy for someone to follow throughout their whole retirement."

[See: 13 Ways to Take the Emotions out of Investing.]

Despite that reality, people forgot the 4 percent guideline was primarily a way to improve communication and even then, was applied only to the first year's withdrawal, Ritter says.

"Instead, it morphed into something the wealth management community is once again seriously questioning," he says. "Today, you see an appropriate emphasis on getting people to think beyond the first year, create a retirement plan, and work with a professional to customize and adapt that plan throughout retirement as markets, personal circumstances, and individual needs change -- something the 4 percent guideline cannot do, and was never intended to do."

Evan Inglis, fellow of the Society of Actuaries, and senior actuary at Nuveen Asset Management in the District of Columbia, pegs the real retirement withdrawal figure at 3 percent.

"Future investment returns are likely to be low for some time to come and this means that retirees will want to be conservative in their approach to spending from their savings," he says. "In general, retirees can spend 3 percent of their assets in a year (over and above Social Security, pension or annuity income)."

Yet situations -- and drawdown figures, can and do change, he says.

"For example, older retirees have the potential to spend more, as a shorter remaining lifespan decreases the possibility of running out of money," Inglis says.

These days, Inglis is using an interesting, and simple formula to figure out how much a retiree should take from his or her savings every year. "Just divide your age by 20 to determine a safe percentage of savings to spend," he says. "For example, a 70-year-old can safely spend 3.5 percent annually."

There are some caveats to that formula. Couples, for instance, should use the younger person's age for the calculation, Inglis says.

[See: 20 Awesome Dividend Stocks for Guaranteed Income.]

Don Bergis, founder of Regent Wealth Management in Morgan Hill, California, also goes with a newer, lower drawdown rate.

"The 4 percent withdrawal figure is a thing of the past and we can blame it on the market, inflation, fees and especially volatility," Bergis says. "Morningstar has come out and said that 2.8 percent is the new withdrawal rate."

David Twibell, president of Englewood, Colorado-based Custom Portfolio Group, says using a rule of thumb to determine retirement withdrawals is generally a bad idea. "There are just too many variables involved for that to give you an accurate forecast of your future retirement income," he says.

Twibell says it is absolutely true that retirees can expect to generate less income now from their retirement portfolio than in the past.

"This creates two problems," he says. "The first is less spending power over time. For many retirees, that can mean the difference between a pleasant retirement and being forced to rejoin the workforce to supplement their income."

The second effect is less obvious, he adds.

"Since many retirees can't make ends meet by using traditional safe investments like government bonds and bank CD's in their retirement portfolios, they are forced to take on more risk to generate acceptable returns," he says. "That means many retirees have far more of their portfolios invested in equities, high-yield bonds, and other higher-risk investments than may be prudent. That's not a big problem as long as markets continue to rise, but it will create havoc for many retirees during the next bear market."

Of course, every retiree's situation is unique, and should require the full attention of a financial services professional to ascertain what retirement withdrawal figure works best for their needs.

[Read: How to Retire as a Millionaire.]

That said, the 4 percent rule is falling out of favor, and that could mean a new annual retirement withdrawal calculus for tens of millions of Americans -- sooner rather than later.

Brian O'Connell is a Bucks County, Pennsylvania, business writer and author. A former Wall Street bond trader, O'Connell is the author of two best-selling books, and is a frequent contributor to TheStreet.com, CBS News, Bloomberg and other major media business platforms.